China is no longer a nation of tech copycats

This article was first published in the April 2016 issue of WIRED magazine. Be the first to read WIRED's articles in print before they're posted online, and get your hands on loads of additional content by subscribing online. For more stories from WIRED's China issue, click here.

The young programmer had an idea, and everyone thought it was nuts. Just out of college, he'd got a job writing software for YY, a livestreaming company based in the city of Guangzhou, in China's Pearl River Delta. More than 100 million users every month stream themselves, or tune in to broadcasts of others, singing, playing video games or hosting shows from their Beijing apartments. The audience chats back, prolifically, via voice or text.

The programmer thought YY should try something new: use its proven streaming technology to run a dating service, which would operate kind of like a TV dating show. A host would set up an online lounge, then invite in some lonely singles and coax them to ask each other questions and maybe find a partner.

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Company executives were dubious. "The CEO almost killed it," says Eric Ho, chief financial officer, sitting in YY's headquarters, atop three floors of furiously coding engineers and designers. Are you sure you want to do this, the CEO asked the kid. This is very stupid. I don't think people will like it! But the programmer was hungry and persistent, so they waved him on: give it a try.

Livestreaming enterprise YY's Guangzhou office

Zachary Bako

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In China, this type of employee didn't used to exist. Ten years ago, high-tech observers complained that the nation didn't have enough bold innovators. There were, of course, wildly profitable high-tech firms, but they rarely took creative risks and mostly just mimicked Silicon Valley: Baidu was a replica of Google, Tencent a copy of Yahoo!, JD a version of Amazon.

Young Chinese coders had programming chops that were second to none, but they lacked the drive of a Mark Zuckerberg or Steve Jobs. The West Coast mantra - fail fast, fail often, the better to find a hit product - seemed alien, even dangerous, to youths schooled in an educational system that focused on rote memorisation and punished mistakes. Graduates craved jobs at big, solid firms. The goal was stability: urban China had only recently emerged from decades of poverty, and much of the countryside was still waiting its turn to do so. Better to keep your head down and stay safe.

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YY programmer Mo Wengang

Zachary Bako

That attitude is vanishing now. It's been swept aside by a surge in prosperity, bringing with it a new level of confidence and boldness in the country's young urban techies. In 2000, barely four per cent of China was middle class - meaning with an income ranging from $9,000 (£6,270) to $34,000 - but by 2012, fully two-thirds had climbed into that bracket. In the same time frame, higher education soared sevenfold: seven million graduated college last year.

The result is a generation both creative and comfortable with risk-taking. "We're seeing people in their early twenties starting companies - people just out of university, and there are even some dropouts," says Kai-Fu Lee, a Chinese venture capitalist and veteran of Apple, Microsoft and Google, who has spent the past decade crisscrossing the nation, helping youths start firms. Now major cities are crowded with ambitious inventors and entrepreneurs, flocking into software accelerators and hackerspaces. They no longer want jobs at Google or Apple; like their counterparts in San Francisco, they want to build the next Google or Apple.

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Anyone with a promising idea and some experience can find money. Venture capitalists pumped a record $15.5 billion into Chinese startups in 2014, so entrepreneurs are being showered in funding, as well as crucial advice and mentoring from millionaire angels. (It's still a fraction of the US venture capital pool from 2014, $48 billion.) Even the Chinese government - which has a wary attitude toward online expression and runs a vast digital censorship apparatus - has launched a $6.5 billion fund for startups. With the economy's growth slowing after two decades of breakneck expansion, the party is worriedly seeking new sources of good jobs. Tech fits the bill.

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YY hosts user performances, live gaming, and a dating show

Zachary Bako

The new boom encompasses both online services and the hardware arena. Recent local-kid-makes-good models like Xiaomi, the fast-rising Beijing device maker, or WeChat, Tencent's globe-conquering social networking app, are leading the way forward. Homegrown firms have distinct advantages, namely familiarity with local tastes, the ability to plug into a first-class manufacturing system built for western companies, and proximity to the world's fastest-growing markets in India and Southeast Asia.

The combination of factors is putting them in a position to beat the West at its own game. Xiaomi, for example, was the fourth-highest seller of mobile phones worldwide in 2015, behind giants such as Samsung, Apple, and Huawei.

As for YY, it turns out it was good that the executives indulged their enterprising programmer. The dating show launched last year and became a hit. It also generated serious profits. YY has no advertising; it earns revenue when users fork over real Chinese currency to buy virtual items they give as gifts to each other or to the "broadcasters" streaming their own lives online. YY takes a 60 per cent cut of each purchase, with the recipient getting the rest as actual cash. (Popular broadcasters make so much money that they live off their YY earnings.)

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At a laptop on Ho's table, I peer at the screen, where a dating event is live-streaming. Money is flying around as male and female guests give each other - and the host - virtual presents: rings (worth $1.55), kisses (16 cents), and love letters (five cents). Some items are pricier yet; for about $1,000, you can buy someone you really like a virtual Lamborghini. In its first nine months, YY's dating show brought in about $16 million, a sum growing rapidly every month.

Last year, YY itself brought in $580 million, and three years after going public on the Nasdaq, its market cap tops $3 billion, even after the market gyrations of 2015. The next Silicon Valley has emerged - and it's in the east.

China's tech boom in the late 90s produced its own Web 1.0: search engines, email and blogging tools, news portals and Alibaba's sprawling online sales market. Back then, China needed local copies of US companies, because US firms often couldn't operate easily in China. The government blocked many foreign sites by using a complex system of filters known as the Great Firewall of China. Local firms had an edge anyway: they understood the particular demands of the Chinese digerati in the early 00s, when internet access was scant.

Ten years ago, for example, eBay tried to dominate in China but failed, partly because many small businesses didn't yet have computers or internet access. At Alibaba, however, founder Jack Ma understood this, so he assembled a huge sales force that fanned out across the country, teaching merchants how to get wired. (He also out-competed eBay's PayPal with Alipay, which holds a buyer's payment in escrow until they receive their goods; this helped build trust in online markets.) Riding that first crest, firms like Baidu and Alibaba became the "big dragons" of Chinese high tech, minting millionaires much as Microsoft had in the 90s.

The success of copycat firms paved the way for "little dragons" - creative, upstart Web 2.0 firms that emerged in the late 00s. The big dragons provided role models, but more significantly, they built the infrastructure crucial for today's high-tech boom, including the cloud services that allow any twentysomething to launch a business overnight and immediately start billing.

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E-commerce giant Meituan

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One of the most successful in this second wave is Meituan, a firm that has become an e-commerce giant by enabling small merchants across the country to broadcast deals to nearby shoppers who have opted in, on the web and within Meituan's mobile app. When WIRED visits the Beijing HQ, it looks like a tropical forest: there are leafy plants between each workstation, and humidifiers puff clouds of moist air upward. Suspended above dozens of coders is an LCD the size of a table for four that reads "8,309": the number of deals Meituan has broadcast so far today. The firm's revenue has skyrocketed in its five years of operation; in 2014, it processed more than $7bn in deals for its 900,000 partners. It anticipated $18.5bn by the end of 2015.

Meituan's CEO, the soft-spoken Wang Xing, is a serial entrepreneur who tracks the emerging creative shift in Chinese startups. He had already made Chinese clones of Facebook and Twitter when, in 2008, he noticed the rise of Groupon. "There's no doubt that we were influenced by Groupon," he admits. But by then he was seasoned enough to spot the flaws in the discounter's business model. Groupon took a big cut - up to 50 per cent - of the revenue from each deal, which left participating merchants bitter. They'd routinely lose money by issuing Groupon deals, so they'd grit their teeth and hope it would attract new permanent customers; usually it didn't. Wang, in contrast, wanted to make Meituan the easiest way for small merchants to charge their customers and stay in contact with them. Setting Meituan's cut at five per cent ensured that merchants nearly always made money.

Gallery: China is no longer a nation of tech copycats

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He also began developing proprietary e-commerce tech. Wang whips out his phone to show a recent example. His programmers fanned out to cinema chains across the country, laboriously connecting Meituan's app to their booking systems. It was a hassle, but now moviegoers can not only buy a ticket from the Meituan app, they can pick their seats. Now one-third of all movie tickets in China are bought via Meituan.

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It's an adroit move, because service - and convenience - is what China's urban middle class increasingly craves. Sporting high-end mobiles and elite fashion from Europe, they pull out their phones for nearly every purpose: using Alipay to cover a cab ride to a party in the artistic outskirts of Beijing; opening WeChat and using its location-sharing function so their friends can find them; posting selfies on Meitu, a picture-sharing service with built-in beautifying filters.

The service economy commanded 44 per cent of all money spent by the Chinese middle class in 2013, a figure that consulting firm McKinsey expects will grow to 50 per cent by 2022, as young urbanites splurge via their phones on everything from massages to takeout food. Even the market meltdown of last August doesn't seem to have dented middle-class consumption: during China's travel-focused Golden Week national holiday, box office sales were up 70 per cent over the previous year and overseas trips were up 36.6 per cent, according to Bank of America-Merrill Lynch analysts.

E-commerce has an astonishing amount yet to grow - a tremendous number of everyday services are not yet online. For example, 80 per cent of China's hotel rooms are booked offline. And people are eager for e-commerce not just because it's convenient, but because it's much less corrupt and opaque than bricks-and-mortar businesses. As Kai-Fu Lee points out, the latter are, by American standards, riddled with inefficiencies and hucksterism. "In the US, hundreds of years of fair competition made commerce relatively fair and transparent," he says. Not so in China. "If you buy a used car, there is no Consumer Reports." By removing middlemen and creating reputation systems, e-commerce firms are making transactions more transparent and trustworthy, he argues. "A mobile social-based solution will be dramatically better," Lee says.

In the short run, though, the high-tech gold rush has produced manic and fierce competition. Whenever a new category opens up, it's immediately swarmed upon by dozens or even hundreds of entrepreneurs. By comparison, competition in the US is mild; for example, there are only two major firms - Uber and Lyft - competing for car bookings. But Lee estimates that in its early days, Meituan had to fight 3,000 competitors dotted across the country. Whoever is left standing is battle-hardened. That's Wang now. Halfway between the old guard and the new, he has become an angel investor, on the lookout for youngsters with ideas: the next little dragons. One company he's investing in is eDaijia, which, rather hilariously, lets car owners find someone to drive their vehicle home when they're drunk. "They are totally dominant in China, and last year they went to Seoul," he laughs, "because, they told me, that's the most drunk city in the world."

China's creative boom in web services is significant enough, but arguably it has an even bigger edge over the US in hardware. The country has spent 30 years becoming the manufacturing capital of the world, so coastal cities like Shenzhen and Guangzhou are now crammed with electronics facilities, from tiny three-person shops to Foxconn's 30,000-employee city-factory complexes cranking out iPhones. All have a deep knowledge of how to make things, so it was almost inevitable that homegrown entrepreneurs would get in on the act.

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Living next to the factories or being able to stroll the electronics markets, they're the first to know when trends in hardware emerge: for example, when a cutting-edge sensor arrives that lets you collect new forms of data - or when the cost of an existing one drops to a penny, allowing it to be sprinkled anywhere.

Zepp Labs' Beijing office

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"It's easier in China than in other places," Robin Han says, "because we have Shenzhen." Han is the 32-year-old co-founder of Zepp Labs, a Beijing-based hardware startup that is the darling of the sports world: it makes a square sensor that tracks your swing - of a golf club, a baseball bat, a tennis racket - then uses an iPhone app to help you improve. Han got the entrepreneurial itch five years ago as a PhD student working in Microsoft's Beijing research office. Big-company life might be stable, but you could toil for years on a project that might never become a real product.

Zepp Labs co-founder Robin Han

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Success was out of your control, he tells me, sitting in the brightly lit Zepp office, where, behind him, two dozen coders and designers pilot keyboards. Han had noticed gyroscopes being used in HTC and HP phones as well as Nintendo Wii remotes and figured they would go down in price as big companies continued to include them in their products. That had potential. He and a friend, Peter Ye (now Zepp's head of R&D), loved sports and hit on the idea for a swing sensor. Players could analyse their motions or compare them to those of professionals; coaches could scrutinise an entire team's practice swings, even remotely.

Han and Ye started with golf. They figured duffers would be willing to spend money on a sensor that promised to improve their game. They lead me to the basement, where they have constructed a huge batting-and-golfing cage. "We spent a lot of hours in here perfecting the sensors and working on our swings," Han says. The walls are studded with marks from errant balls. Their prototype worked so well it attracted the attention of an Apple rep who was touring China, looking for products for the Apple Store. Satisfying Apple's precise aesthetics required them to slowly refine the design through 14 prototypes, but it paid off: since the Zepp sensor launched in Apple Stores worldwide in 2012, Zepp has activated more than 300,000 of them.

Han and Ye got Zepp Labs off the ground with $1.5 million in seed money from angel investor Xiao Wang and worked their contacts to find a good factory to help prototype and mass-produce their device. That last step - finding a talented, Foxconn-class factory that has deep experience in solving design challenges - has traditionally been the hard part of getting things made in China. But in recent years, that's become easier too. A set of middlemen has emerged to help bridge that gap, including Highway 1, a programme by the manufacturing giant PCH: it picks gadget inventors from around the world and finds top-flight factories willing to take a risk manufacturing a product by an unknown new talent.

Hackers at XinCheJian hackerspace in Shanghai

Zachary Bako

There's also been a hackerspace movement in China. The first one - Shanghai's XinCheJian - was co-founded in 2010 by Chinese internet entrepreneur David Li, when he noticed how cheap prototyping tools were allowing kitchen-table inventors to produce increasingly slick prototypes. Now creators from across China mix with expatriates who flock to XinCheJian from around the world, brainstorming ideas with each other and going on tours of factories organised by Li to help them understand how China's hardware ecosystem works. Much like a gym, members pay monthly fees to XinCheJian, which gives them access to the hackerspace's tools and advice from fellow inventors.

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XinCheJian co-founder David Li

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"I always encourage people: get to your proto­type fast, find manufacturing partners, and get your Kickstarter campaign finished," Li says, sitting at the hacker­space's table, in front of a fridge emblazoned with a sticker that reads do epic shit. The rooms behind him are filled with metal lathes, electric tools and rows of 3D printers. One product that recently emerged from XinCheJian is Wearhaus headphones, which enable one person to stream music from their phone while friends listen in, letting them privately enjoy the same music while, say, co-working or studying. The first run of 3,000 headphones sold out, and now a larger run is in the pipeline.

China's creative generation has proven it is ready to compete head-on with the world's top high-tech brands. "Apple and Samsung are right to be worried," says Bunnie Huang, a well-known hardware hacker. (Indeed, Samsung's global share of the smartphone market dropped to 21.4 per cent in the second quarter of 2015, from 32.2 per cent in the same period of 2012.) When it comes to hardware, Chinese inventors benefit from proximity to the world's largest base of consumers, which is growing fast. Xiaomi's first major foreign expansion wasn't to the US but to the much huger - if poorer - India, where it sold one million phones in the third quarter of last year. Sew up China and India, it realised, and that's a third of the planet. In context, the US, where many consumers already own smartphones, isn't a big market.

Zachary Bako

Yet while Chinese firms are challenging the big tech firms, the flow of opportunity goes both ways: it's getting easier and easier for western entrepreneurs to go and work in China. They now regularly flock to hardware and software accelerators in the coastal cities so they can meet local collaborators or find factories. One French woman arrived in Shanghai last year to team up with Chinese coders and create an online market for French wine, targeting the chic restaurants where urbanites dine. Young American inventors congregate at HAX in Shenzhen, where they prototype everything from retro animated-GIF cameras to customised-pill-creation robots. China is essentially becoming a Mecca, a destination for people with ideas - much as Silicon Valley did a generation ago.

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I saw that one day toward the end of my visit. I dropped by David Li's XinCheJian hackerspace, where Li was meeting with a startup team he'd been mentoring, including a Dutch-Italian man named Lionello Lunesu, who has lived in China for eight years, and a Latino man named Berni War. They were looking over their latest prototype, which had been sent by courier from a nearby factory. It was a little device that gives you alerts from your computer or phone, almost like an Apple Watch that sits on your desk instead of on your wrist. "For David, we're not going nearly fast enough," Lunesu said.

Li picked up the gadget and stroked its sleek white sides. "That's the same plastic they use for the iPhone 5c," he said. The entrepreneurs grinned. A lot of this opportunity is not available in the US. That's why they're here.

Clive Thompson is a contributing editor at WIRED US and author of Smarter Than You Think (William Collins)

This article was first published in the April 2016 issue of WIRED magazine